Financial market imperfections, informality and government spending multipliers

Alok Kumar

Journal of Development Economics, 2023, vol. 163, issue C

Abstract: Developing countries are characterized by underdeveloped financial markets and a large share of informal sector in economic activity. Evidence suggests that countries with less developed financial sector have lower government spending multipliers. This paper quantifies government spending multipliers in India using an estimated new-Keynesian DSGE model with two types of entrepreneurs: formal and informal and imperfect financial market. In the model, informal entrepreneurs are financially-excluded and the banking sector is monopolistically competitive featuring collateral constraint and sticky interest rates. Results show that the government consumption multiplier is significantly less than one at all horizons. The government investment multiplier is also significantly less than one at shorter horizons, but becomes approximately one at longer horizons.

Keywords: Government investment; Government consumption; Financial market imperfections; Government spending multipliers; Informal sector; Financially-excluded entrepreneurs (search for similar items in EconPapers)
JEL-codes: D58 E31 E32 F11 F41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:163:y:2023:i:c:s0304387823000585

DOI: 10.1016/j.jdeveco.2023.103103

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